Multi-level marketing – in need of cognate regulation?

Times of India, December 30, 2011

By Pradeep S Mehta

The country has been periodically rocked by scams of MLM companies and such frequent frauds indicate regulatory circumvention . Recently, two such frauds came to light where the citizens lost an estimated Rs 500 crore when two MLM investment companies, Gold Sukh and Eve Miracle, duped people of Rajasthan and Madhya Pradesh. The modus operandi of both was similar – spreading their schemes amongst gullible investors and running away when new joining stopped.

These companies offered high returns on investment – even 300 per cent in one year!

Earlier, the Ministry of Corporate Affairs had initiated a probe into six MLM companies including Speak Asia Online. The Reserve Bank of India (RBI), too, had flashed a red signal to banks in respect of MLM companies advising caution in opening of accounts, etc.

MLM involves a strategy whereby the sales team earns not only for sales they generate themselves, but also for the sales of others they recruit , creating a cascade of distributors with multiple levels of compensation. MLM has been referred to as pyramid selling, network and referral marketing.

As per extant laws, if any company is desirous of engaging in any business activity , it needs to register itself under the Companies Act, 1956. These companies are then regulated by a regulator or by the state government concerned.

For banking and non-banking financial services, RBI is the regulator and for stock markets , the regulator is the Securities and Exchange Board of India (SEBI). However, there are certain companies that do not fall under the purview of either of these regulators and it is in such grey areas where companies like Gold Sukh (using members ‘ deposit to purchase gold) take advantage.

The state governments, too, have been slow to react to MLM frauds. However, Kerala became the first state to set guidelines in September 2011 for MLM companies triggered by the Tycoon Empire International scam of about Rs 1000 crore.

The guidelines include refund of money to a customer not satisfied by the product within 30 days; banning of membership fee; freedom to customer to examine samples prior to purchase; necessity for the company representative to carry a photo identity issued by a government agency; availability of a permanent grievance redressal mechanism; proper accounting ; transparency, etc.

State-wise set of guidelines , even when adopted by all states, would have their own drawbacks, such as lack of uniformity which the MLM companies would be able to exploit to their advantage . The MLM case strengthens the argument for having one regulator for the financial sector in India, i.e. cognate sectors, such as banking, non-banking financial services, stock markets , etc. clubbed under the rubric of ‘financial sector’ .

Pradeep S Mehta Secretary General, CUTS International

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